In many cultures, to live a long, presumably happy, life is the very definition of success. But in the realm of retirement planning, living a long life can be a mixed blessing.
As life expectancies in developed countries continue to increase as a result of medical advances, so, too, do the chances that retirees who haven't saved enough will outlive their money. Many seniors who assumed they were financially set for life have learned the hard way that a retirement plan based on a life expectancy of, say, 85 may require serious cutbacks to avoid running out of money as they approach and surpass that age. At the same time, most retirees would prefer not to have to pinch pennies throughout their golden years just because it's possible they might live much longer than life-expectancy statistics would suggest. In some ways, estimating how much one will have saved by the time he stops working is the easier part of the retirement-planning equation; it's figuring out how long that money will have to last that's the real challenge.
Estimating how long each of us will live is just as important as other key retirement-planning variables such as savings rate, rate of return on your investments, and withdrawal rate. In attempting to answer this question, many people will look no further than government statistics about average life expectancies for men and women at various ages, but as we'll see in a moment, those can be of limited value.
Seeking Out a Fuller Picture of Life Expectancy
One of the first places many people turn to estimate their longevity is the Life Table found on the Census and Statistics Department. This is a good starting point, but the problem, as with most life-expectancy estimates, is that it is too general to be of much use.
For individuals who want to be as certain as possible of not outliving their money, planning a retirement that lasts well beyond 100 may be a worthy, if unrealistic, goal. The longer the money needs to last, the less you can afford to withdraw each year along the way. Trying to preserve your nest egg on the remote chance that you'll live longer than almost anyone else of your generation involves a trade off in terms of quality of life. You may find that planning based on a life expectancy projection that puts you in the 80th percentile for your age and gender--in other words, with just a 20% chance of outliving your money--strikes a better balance between guarding against longevity and not depriving yourself of the lifestyle you envisioned for your golden years.
All life-expectancy projections should be seen as just that: projections. Any number of factors could alter the actual outcome for the broader population or for individual members. For retirement-planning purposes, the only life expectancy that really matters is your own, along with that of your spouse or partner. It's here that more personal information comes into play when guessing at one's own longevity.
Key Risk Factors
To help identify some of these factors we consulted a pair of experts at analyzing life expectancies--Maureen Leydon, vice president of individual underwriting for MetLife, and Joe Tomlinson, an actuary and certified financial planner based in Greenville, Maine.
However, learning how these pros look at longevity risk factors among broad populations can help us identify risk factors in our own lives.
Here's how Leydon and Tomlinson responded when asked about the role each of the following factors plays in life expectancy.
Health profile: Not surprisingly, Leydon says an individual's health profile is among the most important considerations in the underwriting process. "In general the biggest risk factors that we consider also correlate with what the largest causes of death are [in the United States]," says Leydon. She mentions cancer and cardiovascular, respiratory, and blood diseases as among the top risk factors but adds that factors such as family longevity, height and weight, and whether the person uses tobacco products also come into play.
From there she says she would ask questions about the individual's personal health history, asking whether he has been diagnosed with any kind of chronic health problem, whether he visits a doctor on a regular basis, and whether he takes any medication and why.
Tomlinson mentions many of the same factors, along with whether the individual is a heavy drinker and whether the individual gets regular exercise.
Occupation: Leydon says that after a person's health profile, the next obvious factor to look at is his line of work. In particular, Leydon says an underwriter would take note of whether the person has a dangerous occupation or is in the military. Along with the occupation itself is whether the person receives health benefits from work because a lack of access to health care is another risk factor.
Income: Although Leydon says that income in and of itself is not seen as a risk factor in evaluating someone for life insurance, both she and Tomlinson point to it as a factor that can have an impact on an individual's health. "There's indication that overall life expectancy has been improving, and there's some evidence that it's increasing more for the more upscale," says Tomlinson.
Time spent abroad: Whether living overseas for work or just visiting, spending significant time in a country with limited access to health care or one that has exposure to diseases such as drug-resistant tuberculosis can increase someone's risk of premature death, Leydon says.
Other factors: Risky hobbies such as skydiving would also be a red flag in the underwriting process, Leydon says. Other behaviors that increase mortality risk include alcohol or drug abuse or a driving record that includes multiple speeding tickets, accidents, or DUIs. Spending time in prison can also have a negative effect on life expectancy, she adds.
An Educated Guess at Best
None of these risk factors guarantees a life expectancy shorter than the average. Indeed, how long you live could be determined by just one of the factors mentioned above, a combination of factors, or none at all.
Tomlinson, for one, thinks too many people run the risk of outliving their money. "I think people tend to underestimate how long they might live," he says. "They look at life expectancy from birth. They may look at Social Security tables from age 65. If they are in good health and take good care of themselves, they may well live longer than the Social Security tables suggest."
Tomlinson sees the trend toward rising life expectancies continuing. "If mortality continues to improve, then the kinds of ages we see people dying at today are going to be different than the ages we see them dying at in 30 years," he says.
He cautions that tomorrow's longer life spans require today's retirement savers to think not just about having enough money to support a longer retirement but also enough to pay for additional costs, such as long-term care.
One last point to remember is that life expectancy is not a fixed measure, and it's wise to revisit it as you get older. An individual who experiences serious health problems early in retirement would likely make different planning decisions than someone who remains reasonably healthy well into his 70s or 80s. Folks in the latter group might want to revisit their plans and assume a somewhat higher life expectancy than they did in their mid-60s.
The point is not to fixate on one number when calculating life expectancy for retirement-planning purposes. Build some flexibility into your plan so that if things change as you go along, you'll be able to adjust accordingly.
Adam Zoll is an assistant site editor with Morningstar.com
